China Wealth Fund Swaps Uralkali Bonds for 12.5% Stake

By Yuliya Fedorinova and Michelle Yun -
Sep 25, 2013

China took a 12.5 percent stake in
OAO Uralkali (URKA), the world’s biggest producer of potash, giving the
nation a bigger say in a global battle for market share and
expanding the reach of its overseas agriculture investments.

Chengdong Investment Corp., a unit of sovereign wealth fund
China Investment Corp., exchanged bonds for shares in the potash
producer, Uralkali said yesterday in a statement. The Chinese
fund purchased the bonds in November from billionaire Uralkali
investors Suleiman Kerimov, Filaret Galchev and Anatoly Skurov.

China buys about a fifth of the $20 billion in global
potash shipments to enhance crop yields in the world’s most
populous nation. CIC is taking the stake in Uralkali as
shareholders in pork producer Smithfield Foods Inc. (SFD) yesterday
approved the largest Chinese acquisition of a U.S. company.

“As economic development and urbanization continues,
China’s demand for agricultural products will keep on growing,”
said Ma Wenfeng, an analyst at Beijing Orient Agribusiness
Consultant Ltd. “Agriculture and resources are relatively
stable investments, but more importantly, it provides China with
something that it needs in the long term.”

China Deals

China is scouring the world for farm and food assets as it
seeks to bolster supplies needed to feed its people and to
enhance domestic food security amid a series of food scandals.
The nation has bid $10.3 billion this year on agricultural
assets including chemicals and food, according to data compiled
by Bloomberg.

KSG Agro SA, a Ukrainian grain and sunflower seed producer,
is working to sign an accord with China’s Xinjiang Production &
Construction Corp. on irrigation, KSG said Sept. 23. The
contract is for XPCC to install irrigation equipment on 3,000
hectares in Ukraine in 2014, KSG said by e-mail.

Under a 50-year plan, China will lease as much as three
million hectares of farm land in the Ukraine, the South China
Morning Post reported on Sept. 22. KSG has no intention to sell
farm land to foreign companies, the company said in the e-mail.

Price Influence

Uralkali in July ended a potash marketing joint venture
with Belarus’s Belaruskali that controlled about 40 percent of
global exports, roiling the worldwide market for the soil
nutrient. China’s influence over prices has increased since
Uralkali quit the Belarusian Potash Co. venture, Danila Yakub, a
UBS AG analyst, said in a report last week.

The lack of clarity over Uralkali’s future ownership and
doubts that the BPC venture can be restored have strengthened
the position of the biggest potash importer, UBS said.

China’s stake could theoretically give it added sway in
contract negotiations, Kirill Chuyko, head of equity research at
BCS Financial Group in Moscow, said by phone yesterday. “We
don’t know if there are any additional terms in the agreement
between China and Uralkali and its owners,” he said.

Uralkali said the transaction was agreed on by the Chinese
fund and the potash producer’s shareholders. CIC’s press office
declined to comment for this story.

“We don’t have information on whether CIC plans to get a
seat on Uralkali’s board,” Alexander Babinsky, a spokesman for
Berezniki, Russia-based Uralkali, said by e-mail. “We plan to
ask our new shareholder very soon about its plans.”

Billionaires’ Stake

Kerimov, Galchev and Skurov, whose Wadge Holdings Ltd. sold
the bonds to the Chinese fund, retain a combined 33 percent
stake in Uralkali. They are said to have received offers to sell
out of the Russian company after it quit the venture with
Belarus and its Chief Executive Officer Vladislav Baumgertner
was arrested in Minsk in August. Baumgertner continues to be
held in a Belarus KGB prison, charged with abuse of office as
chairman of the trading joint venture, Belarusian Potash Co.

CIC’s stake would rise to about 14 percent once Uralkali
fulfills a pledge to cancel about 12.4 percent of its shares
held as treasury stock following a buyback program. Uralkali
said on Sept. 10 it will seek to cancel the stock in the first
half of 2014. The billionaires’ combined stake will rise to
about 38 percent.

“China considers potash to be a strategically important
ingredient,” BCS’s Chuyko said. “It was clear that CIC would
exchange its bonds for Uralkali shares as it didn’t seek to earn
a return from this investment merely as a lender.”

Potash Competition

China’s stake in Uralkali is a “non-event,” Wayne
Brownlee, chief financial officer at Potash Corp., North
America’s largest fertilizer producer, said yesterday. Brownlee
said the industry still has significant barriers to entry and he
doesn’t see Uralkali giving China special pricing.

Uralkali advanced in Moscow trading yesterday after the
first report that the CIC unit had exchanged its bonds for
shares. The shares gained as much as 3.9 percent and closed up
0.5 percent at 171 rubles in Moscow.

CIC, created to manage part of China’s $3.5 trillion of
foreign-currency reserves, reported a 10.6 percent return on its
overseas investments last year as global equities rallied.

Net income at the $575 billion sovereign wealth fund, which
also holds the government’s stakes in China’s biggest banks,
rose to $77.4 billion from $48.4 billion in 2011, Beijing-based
CIC said in its annual report in July. Its overseas investment
returns compared with a 4.3 percent loss in 2011 amid declines
in global commodity prices.

Putin Ally

Vladimir Kogan, an ally of President Vladimir Putin, is a
leading bidder for Uralkali, people familiar with the situation
said on Sept. 13. Kogan is seeking to raise $9 billion to enable
him to purchase a stake large enough to gain operational
control, the people said. Kogan used to own a bank in Putin’s
hometown of St. Petersburg. Other bidders include billionaires
Mikhail Gutseriev and Vladimir Evtushenkov, Forbes Russia
reported this month, citing people it didn’t identify.